Small Cap Value Report (18 Jan 2017) - BRBY, TRB, MIDW, PFD, BOTB

Wednesday, Jan 18 2017 by

Good morning!

I'm kicking things off today, but Paul will probably be along later with a few thoughts of his own.

I am looking at Burberry (LON:BRBY), Tribal (LON:TRB), Midwich (LON:MIDW) and Premier Foods (LON:PFD), while Paul is looking at Best Of The Best (LON:BOTB).

Also, please note that yesterday's report now covers 10 stocks, thank to a huge contribution by Paul, including late updates. The report now includes:

Brady (LON:BRY), Craneware (LON:CRW), Distil (LON:DIS), dotDigital (LON:DOTD) Elegant Hotels (LON:EHG), Games Workshop (LON:GAW), Greggs (LON:GRG), Hotel Chocolat (LON:HOTC), Johnston Press (LON:JPR), Miton (LON:MGR).

Click here for yesterday's report.



Burberry (LON:BRBY)

Share price: 1616p (+1.4%)
No. shares: 440m
Market cap: £7,000m

(At the time of writing, I holding a long position in BRBY.)

Third Quarter Trading Update

Though it is not a small-cap, I think it would be remiss of me not to mention Burberry. This is a stock I've previously owned and purchased on behalf of clients, and is currently a substantial (nearly 20%) part of my portfolio. (I don't recommend that others run such a concentrated portfolio as this.) 

I had a poor year in 2016, partly due to some heavy GBP exposure in my companies, but it would have been much worse without Burberry, which produced a total return of 45%.

Look at the Q3 result: revenue is up 4% underlying, but 22% at reported FX.

I really think it's a shame that currency issues have to wreak such havoc on the international financial system, but it's not a problem I'm going to be able to fix. I just need to be more careful with it.

Anyway, I'm pretty happy with these results. China, a country with which I…

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All my own views. I am not regulated by the FSA. No advice.

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Burberry Group plc is a manufacturer, wholesaler and retailer of luxury goods. The Company also licenses third parties to manufacture and distribute products using the Burberry trademarks. The Company's segments include retail/wholesale and licensing. The Retail/wholesale segment is engaged in the sale of luxury goods through Burberry mainline stores, concessions, outlets and digital commerce, as well as Burberry franchisees, prestige department stores globally and multi-brand specialty accounts. The Licensing segment is engaged in the receipt of royalties from the Company's partners in Japan and global licensees of eyewear, timepieces and European childrenswear. The Company's product divisions are Womens, Mens and Childrens apparel, Accessories, and Beauty (which includes fragrance and make-up). Its subsidiaries include Burberry Latin America Holdings, S.L, Burberry (Suisse) SA, Burberry (Taiwan) Co Ltd, Burberry (Thailand) Limited and Burberry FZ-LLC. more »

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Tribal Group plc is a United Kingdom-based company, which provides software and services for education management. The Company's segments include Product Development and Customer Services (PD&CS), Implementation Services (IS), Professional and Business Solutions (PBS) and Quality Assurance Solutions (QAS). The PD&CS segment represents the delivery of software and subsequent maintenance and support services. The IS segment represents the activities through which it deploys and configures software for its customers. The PBS segment represents a portfolio of performance improvement tools and services, including analytics, benchmarking and transformation services, and the QAS segment represents inspection and review services, which support the assessment of educational delivery. Its products and services include license and development, implementation, maintenance, professional and business solutions, quality assurance solutions and other systems related. more »

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Midwich Group Plc, formerly Jade 320 Limited, is a holding company. The Company's principal activities are to carry on business as a general commercial company and to carry on the business of an audiovisual (AV) and document solutions distributor to the trade market, with operations in the United Kingdom, Europe and Australia. The Company's segments include UK & Ireland, France, Germany and Australasia. The Company provides a portfolio of audiovisual categories, such as large format displays, projectors, digital signage and printers. The Company's brands include BOSCH, CASIO, CHIEF, SONY, SHARP, NEC, PHILIPS, RICOH, PLANAR, BrightSign, DATAPATH, revolabs, Reserva, Canon, SAMSUNG and Panasonic. The Company serves AV integrators and information technology (IT) resellers in corporate, education, retail, residential and hospitality sectors. more »

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  Is LON:BRBY fundamentally strong or weak? Find out More »

43 Comments on this Article show/hide all

gus 1065 18th Jan '17 24 of 43

In reply to post #167323

A good consideration of the Mitie (LON:MTO) bear case posted in October 2016. Much of the analysis still applies IMO.


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Beginner 18th Jan '17 25 of 43

In reply to post #167323

My nephew works for Mitie (LON:MTO) . I used to. I would not touch it with your bargepole. There will be an announcement in due course stating that profits have been over-estimated by c30%. Please stay away.

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Beginner 18th Jan '17 26 of 43

In reply to post #167410

Hi chaps. I would side with Andy here. Universities make a great deal of money from foreign students, and no government will deny them this revenue. A UK education is now cheap, and the shift of Asian students to Australasian institutions is being reversed. Additionally there is effective chain educational migration. The key thing is the location of accommodation. Watkin Jones (LON:WJG) (and Empiric Student Property (LON:ESP) ) have been astute in locating their digs in places where there is a large student population (eg York, Leicester, Manchester) and where there are large numbers of foreign PG students (eg Bath). It is location, location, location, I am afraid. These two companies will not be stellar performers, but they both look undervalued to me, and capable of sustaining decent yields. (I hold both).

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herbie47 18th Jan '17 27 of 43

In reply to post #167431

Some universities got a lot of funding from the EU, probably why Cambridge was only area in the East that voted to remain. Not sure what impact this loss of funding will have on students numbers. It seems many students do not leave after they qualify, if the Govt. are serious about reducing immigration it could well be one area that is addressed. Even before Brexit vote, numbers have been falling:

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herbie47 18th Jan '17 28 of 43

Quartix Holdings (LON:QTX) had an update out today, revenue ahead of expectations but profits are in line, the share price has come back down from 465p to 285p so starting to look interesting to me. Expansion in the US market.

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LongbeardRanger 18th Jan '17 29 of 43

In reply to post #167323

Hi Tabhair,

I always pay attention when you suggest a stock is a possible buy, as I've been impressed with your analysis (I recently left a comment on your blog post reviewing your performance in 2016).

Re Mitie (LON:MTO) , I'm actually a former holder, I sold out at the first profit warning. I think what concerns me at this stage is the comments about the debt:

"Despite these lower forecast earnings, we expect to continue operating within our contractual banking covenants."

The fact that they mention this must be cause for concern (ok - they are trying to reassure - but, to misquote Mandy Rice-Davies, they would say that, wouldn't they?). Depending on how bad things get here I think an equity raise is possible (similar to Serco). Critical factors for me are (i) cashflow and (ii) banking covenants - if there is a risk here then they'll raise equity IMO.

So I actually agree that there could be an opportunity but to me that would be on or after an equity raise, which I think is more probable than not at this stage.

If I were to reinvest (which I wouldn't rule out), I'd want to understand better what their banking covenants say.




I've looked at Mitie's accounts and can't find exactly what the covenants are but they do say (in the 2016 interims) that there are leverage (net debt: EBITDA) and interest cover (EBITDA: net finance costs) covenants. If you assume EBITDA will be £60m (equal to their lower end guidance of operating profit), then based on net debt of £231m (per the 2016 interims) their cover is 3.85x. However, net debt could well be higher when they publish their 2016 full year results. Difficult to know how close to the wind they're sailing as they don't say what the maximum permitted ratio is.

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Beginner 18th Jan '17 30 of 43

In reply to post #167434

The decline in EU funding will have no impact on student numbers whatsoever. EU grants primarily cover research. Any sum received as such is automatically top-sliced at 47%, for university admin costs (let's see a business get away with that!!). Perhaps 2% goes to pay for PG student scholarships. If these are necessary for a project, funding will be found elsewhere. UG students from Europe generally come short term, and under the Erasmus scheme. It is not EU dependent, and the UK is the largest recipient of students under this programme. That is simply because students want to use English in their studies, usually with an eye to later employment in the US. Leaving the EU will have almost no impact on student numbers. As for the increasing cost, there is NO evidence this has deterred the middle classes from sending Tarquin and Jocasta off to study Byzantine History with Welding, and these arethe people who take halls. Wayne and Waynetta are disappearing from the scene however, but most from this demographic tended to attend locally or day commute. Worry ye not in this sector.

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ISAallowance 18th Jan '17 31 of 43

Good trading update from FDM (Holdings) (LON:FDM) today (I hold), revenue up over 30% at constant currency, nearer 40% with $/£ tailwind, so similar or even slightly better growth rate than last year.

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HRISC 18th Jan '17 32 of 43

Thanks Paul.. I had not seen BOTB before, except walking past the cars at some airports! It looks very appealing and I might well add some.

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paraic84 18th Jan '17 33 of 43

In reply to post #167431

Empiric Student Property (LON:ESP) 's NAV per share barely seems to increase so I sold at the end of last year as I got bored! I think a better specialist property play is Tritax Big Box REIT (LON:BBOX) which pays out decent dividends, and it has reasonable growth prospects due to online retail creating demand for large out-of-town warehouses. That said, I think the growth in NAV in all property companies will probably slow this year although I maintain a hold for the dividend. I do like Palace Capital (LON:PCA) though as that definitely looks undervalued and the management seem to execute well just like at Tritax Big Box REIT (LON:BBOX).

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Beginner 18th Jan '17 34 of 43

In reply to post #167455

Paraic, you are bang on! Empiric Student Property (LON:ESP) and Tritax Big Box REIT (LON:BBOX) IPOs took place at more or less at the same, and I chose the wrong one! a 35% increase against 7% says it all! But I took a tiny stake in the latter at the rights issue, so all is not lost. As it stands, Palace Capital (LON:PCA) offers the lowest yield of the three, but I like the fact it is not London dominated, but has some very impressive clients. I will take a further look at it. Ta.

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JDW72 18th Jan '17 35 of 43

In reply to post #167410

I would also say that setting aside the foreign student aspect, it is becoming less and less appealing to spend 3 years accumulating 50k of debt for a degree in media studies or whatever. Increasing numbers of my peers kids (bright and very able kids) are shunning university and just going out there and getting on with life.

Sure, there are still lots of degrees (STEM, architecture, medicine in all its guises etc.) that will endure, I am not predicting the end of universities, but there are a lots of degrees that are already struggling to fill places.

Couple that with an increase in meaningful apprenticeships (e.g. at places like E&Y and other big consulting firms etc.) and no longer is a degree the ticket to the executive washroom. It's actually a way to saddle yourself with huge debt on the uncertain promise of a better future....

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Chris Jackson 18th Jan '17 36 of 43

In reply to post #167386

Fortunately I already cut my losses on Pearson last September - and have watched it struggling to maintain even a modicum of value ever since. Company has definitely lost its way - currently a basket case with no sign of turnaround any time soon.

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Steves cups 18th Jan '17 37 of 43

Best Of The Best (LON:BOTB)
I think Paul is bang on with Best Of The Best (LON:BOTB). Having read his reports on this outfit I was always a bit scared of the PE and the enormous spread. However up early this morning the RNS caught my eye. The things that impressed me were that with only 10% sales lift EPS rises 50%, the online growth, the ability to scale up or down with marketing spend, the new website and social media and the ability to move this business to different geographies.
Judging by the price shifts this afternoon a lot of people are now thinking the same. Substantial EPS upgrade on the way seems likely.
Now long on this

Thanks to all for comments, a must read with double the expertise


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JDW72 18th Jan '17 38 of 43

In reply to post #167443

I've replied in another thread, but Jocasta and Tarquin's mum and dad ain't able or willing to support them in their desire to juxtapose Byzantine History with Welding any more.

It's the squeezed middle again.

If one of mine comes to me and asks me to fund them doing some such nonsense they'll get short shrift. I am not an outlier in this. I see it all around me.

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gsbmba99 18th Jan '17 39 of 43

In reply to post #167437

Not a holder but watching from a distance. I read the Quartix Holdings (LON:QTX) announcement quite negatively. In particular - "The additional investment, taken together with the strategic decision to move away from low margin insurance sales means that we are now expecting to deliver 2017 results broadly in line with 2016 results." It would appear that margins in insurance are uneconomical, hence their withdrawal, and margins in fleet are declining. The previously planned 12% increase in EPS for FY17 is now 0% to -5% ("broadly in line with 2016 results"). That's a pretty sizable downgrade in the outlook. Maybe the market was already fully expecting this but I was surprised the share price didn't decline further.

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herbie47 18th Jan '17 40 of 43

In reply to post #167482

Thanks for that. The share price did fall to 265p this morning but soon bounced up. As the profits seem to be flat for the next year I don't think there is any rush to buy any but it's one to watch. Quite a bit depends on the US market I feel.

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Beginner 18th Jan '17 41 of 43

In reply to post #167479

But would you be happy to fund them to do BA Hons Accountancy, or to go to St Numpty's, Oxbridge? Universities in the upper ranks still select rather recruit, and those in the lower ranks are stealing the vocational march on the old Techs and Polys. Check out the rise of courses such as chiropody and optometry. Remember, the cockroaches are the ones that will survive the bomb! (Also, you won't really fund them, I will. My taxes already massively subsidise the sector, and T and J will get those lovely low cost loans that half of them will never pay back).

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Jardine 18th Jan '17 42 of 43

Some interesting news flow from NATURE (LON:NGR) recently has led to an increase of over 100% in the share price over the last month. Maybe just the start of a sustained recovery?

1. Prior to Christmas they announced a contact win by their oil and gas division. Not so significant for its size, given it is over 5 years, but more so as it indicates the new management team are succeeding in their strategy and their technology is being appreciated for the cost savings it can deliver.

2. Yesterday they announced the long awaited sale of their Gibraltar facility for £4m. This eliminates a loss making operation and gives a significant sum to support future investment in other areas of activity.

3. Today the directors and some senior management have made more than token purchases of the companys shares, led by the CFO.

I expect more positive news flow in the coming months as they invest the funds from the disposal.

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ds1980 18th Jan '17 43 of 43

Student numbers ain't going anywhere anytime soon regardless what happens with the EU. Visa's are the main issue that will affect numbers but they'll find a way to get around any issues. As an ex employee of a London uni/poly and landlord of several student gaffs it isn't so much saturation that worries me it's the modern new student developments that offer sky, thai massage and unlimited porn downloads which is what I think the likes of JDW? Are offering (sorry haven't checked). If so they're onto a winner. You need the best property. This is what students want. They don't care about cost. It's not their money. There is a huge demand for decent student houses let alone decent rental accommo. main problem for these companies is that Any developer can do these type of builds.. I looked at buying a 48 bed place in Hull for this exact type of thing but I couldn't find a way of making the numbers work however I looked at it and if you can't do it in hull then there's not many other places where you'll be able to do it!

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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